Since we established the first family trust in China in September 2012, critics have long complained that many companies are selling family trusts as “Wealth Investment Products” and are misleading clients in this way. I want to stress here today is that selling family trusts purely as “Wealth Investment Products” is certainly not right; however, the absence of proper strategic asset allocation in wealth inheritance planning is very likely to cause the entire wealth inheritance plan to eventually deviate from the established direction, or even completely fail.

Convinced of the great importance of asset management, wealth management and asset management industries have employed lots of financial engineering technology to conduct in-depth research and discussions. However, there is a very small and simple link that is in urgent need of further optimization. In fact, even a tiny deviation from this link may affect the overall planning. This link is “Know Your Customer” (KYC).

Let’s assume that you have a client named Newton who has just experienced a major setback and lost a lot of money in his investment in a South Sea Company. You have probably heard of this story, but it is not our intention to go into detail about its authenticity. Or, let’s assume that the client is highly educated and just as smart as Newton and has just been through one of the craziest financial bubbles in history. The model created by him was much better than any financial engineering model (incomparable to our “smart beta”), and can be used to estimate the movement of celestial bodies. So, how do we persuade our client to trust us with asset planning? I think most salesmen tend to say something like “Surely you are the one of the smartest physicists in the world, but investment is a profession that is best handled by professionals.” Considering that a person as smart as Newton also makes mistakes in timing and has suffered huge losses (as in the case of investment in a South Sea Company), we have a very good chance of persuading our client to hand over his investment affairs to professional fund managers and fund companies.

Then suppose that you happen to be currently working for a fund giant (Fidelity Fund), and that the company has the best fund manager in the world (named Peter Lynch). In this context, you have recommended Magellan Fund, a well-known fund managed by Peter Lynch, to your client Newton.

Magellan Fund is one of the most highly rated funds in the whole world, however, on average, its clients are losing money. This is a problem faced by all of our salesmen when conducting asset allocation for clients. First, you responsibly persuade your clients to hand over their investment affairs to professional wealth management or asset management companies like us, and then you recommend the best fund manager in the whole market or the whole world to them. And then what? Your clients may end up losing money. So, when we say that asset allocation determines returns, what are we really talking about?

To answer this question, let’s review our example above, and see what our sales manager does for Newton. First, he persuades Newton to hand over his investment affairs to professionals; second, he selects the most highly rated fund for him. However, has he paid close attention to the most critical aspect of asset allocation? What is the core issue in asset allocation? Generally, we appraise the performance of a fund manager according to three factors: timing, stock selection, and what else? In the past, we used to build models for timingusing all kinds of methods and advanced technology, and we constantly improved our products. At the beginning, there were many active public funds; later, the lack of an adequate incentive mechanism gave rise to a big private equity fund industry. In contrast, public funds also continue to move forward, and have begun to take the initiative or “smart beta”. However, have they really solved the most critical issue of asset allocation?

There are two core reasons that lead to investment failure, that is, greed and lack of patience. Today, I want to take this viewpoint forward by saying that both greed and lack of patience are probably the result of the absence of adequate efforts on the part of salesmen. In other words, greed and lack of patience should not be simply understood as clients’ psychological tendencies or their habits. In many cases, what seem to be greed and lack of patience are in fact a passive act or a compulsion. For instance, when a client has a child who is almost school-going age, he has to redeem his funds to purchase a house in a school district. In case of an unexpected financial crisis, the owner of a company experiencing financial difficulties needs funds to save his business. In cases like this, simply accusing him of being greedy or inpatient is simply not fair. On the contrary, if you have not taken these circumstances into consideration or have not persuaded the client to take these circumstances into consideration, these will become the weakest link in wealth inheritance planning. As a result, this tiny inconspicuous KYCdetailcan jeopardize the overall effect of strategic asset allocation. KYC and strategic asset allocation can be seen as two sides of the same coin, which are closely related and complementary. The influence of the two factors is inconspicuous in the process of a single product sale, but becomes extremely obvious in family wealth inheritance planning, mainly because of the length of the investment period and because KYC is more detailed. Unfortunately, there are few advisors who can perfectly combine the two factors, and this has significantly influenced the effect of wealth inheritance planning.

As indicated by a review of the standard processes of the whole industry, KYC constitutes the first step; the second step is to determine the risk tolerance of the client; the third step is to decide the optimum asset allocation ratio, or, put simply, to decide the proportion of high-risk funds to be purchased. You can check with various departments of your company to see if they have satisfactorily accomplished all these processes. In order to decide the allocation ratio of equity funds according to the asset allocation model, we must take into account an important parameter within KYC, that is, the risk preference of the client. If you have mistaken or even misunderstood your client’s real risk preference, it will be impossible to realize their wealth inheritancegoals.

From the 1960s until today, the wealth management industry has seen generations of asset allocation models, and used many advanced models for quantification; however, there are mainly three generations that have witnessed extensive applications. As far as the three generations are concerned, a passive risk balance model is frequently introduced. In demonstrations to clients, the risk balance model has the highest net value and the smallest fluctuations, so salesmen tend to recommend this model to clients; it is a natural choice. However, I want to say today that this is completely wrong. After giving such a recommendation to your college roommates, your relatives and friends, or your most loyal clients, it may end up having a negative impact on their families’ financial security.

This is a typical efficiency frontier. The first step is to find an optimum point on it; after that, the risk preference of the client is determined on the right side; the final step is to set the ratio of risky assets to risk-free assets based on benchmark portfolios and risk-free bonds. This is the entire process of asset allocation.

My question today is: What kind of model do you use for determining risk preference? You can consult the sales department of your company to see which model they use. Here we give a few examples to show the problems involved here.

The first example involves a client involved in one of the first batches of pension schemes in China in 1990. At that time, he earned what seemed to be a lot of money back then (roughly 100,000 RMB). He was quite successful then, and he cared about his younger sister a lot. He offered to prepare a pension scheme for her with 10,000 RMB, and told her that she could rest assured and could even quit her job in a state-owned enterprise if she should ever get wrongly blamed. In his opinion, 10,000 should be enough to provide a pension guarantee. In the end, his younger sister did not quit her job, instead she retired in the last two years or so, and the pension provisions continued until now. In China, the proportion of stocks and other equity assets in the insurance funds of an insurance company cannot exceed 30%, so the average rate of return is about 8% to 10%, i.e., an annualized rate of return of 6% (which is pretty high). However, calculated by this rate, the 10,000 RMB in 1990isjust 50,000 RMB today, which means that the promise made by the elder brother cannot be fulfilled today.

Pension planning in 1990

Investment period

Annual rate of return

5

10

20

25

30

50

70

100

200

1%

1.1

1.1

1.2

1.3

1.3

1.6

2.0

2.7

7.3

2%

1.1

1.2

1.5

1.6

1.8

2.7

4.0

7.2

52

3%

1.2

1.3

1.8

2.1

2.4

4.4

7.9

19

369

4%

1.2

1.5

2.2

2.7

3.2

7.1

16

51

2,551

5%

1.3

1.6

2.7

3.4

4.3

11

30

132

17,293

6%

3

8

2

3

7

18

59

339

115,126

7%

1.4

2.0

3.9

5.4

7.6

29

114

868

752,932

8%

1.5

2.2

4.7

6.8

10

47

219

2,200

4,838,950

9%

1.5

2.4

5.6

8.6

13

74

417

5,529

30,570,292

10%

1.6

2.6

6.7

11

17

117

790

13,781

189,905,276

11%

1.7

2.8

8.1

14

23

185

1,488

34,064

1,160,368,037

12%

1.8

3.1

9.6

17

30

289

2,788

83,522

6,975,968,872

13%

1.8

3.4

12

21

39

451

5,194

203,163

41,275,153,465

14%

1.9

3.7

14

26

51

700

9,624

490,326

240,419,819,795

15%

2.0

4.0

16

33

66

1,084

17,736

1,174,313

1,379,012,080,496

16%

2.1

4.4

19

41

86

1,671

32,513

2,791,251

7,791,083,258,011

17%

2.2

4.8

23

51

111

2,566

59,294

6,585,461

43,368,295,078,886

18%

2.3

5.2

27

63

143

3,927

107,582

15,424,132

237,903,845,036,820

19%

2.4

5.7

32

77

185

5,989

194,217

35,867,090

1,286,448,125,554,300

20%

2.5

6.2

38

95

237

9,100

348,889

82,817,975

6,858,816,903,929,020

What has gone wrong?

As discussed above, in analyzing the risks faced by a client, usually a benchmark combination is used to configure his asset allocation. The problem is that, when calculating the allocation parameters, data from a one-year window is used. Thus means that when a client wants to buy and hold for 10, 20 or even 30 years, the volatility of stocks may be lower than that of bonds. Thus, in calculating the benchmark combination, it is dangerous to use one-year volatility, even to allocate only 30% of stocks.However, if you use the volatility of a longer period (say ten years), your benchmark portfolio may suggest the allocation of 70% of stocks or more.

Measurement of risks

Stocks

Bonds

Bills

Holding period (years)

12-2 Average annual rate of return after eliminating inflation

The Future for Investors by Jeremy Siegel

Is the discussion over at this point?

Obviously not. Is it possible to solve this problem by adjusting the volatility calculation method according to the terms required by the client?

In another example set in 2004, after 15 years, a client came to you with 10 million RMB. He wanted to give it to his child when he turns 18 years old, either as tuition for college or as start-up capital for a business. His child was six in 2004, so there would be a period of 12 years for investing the 10 million. This was the information from the client. What would your plan be?

I’ll try to illustrate this with two plans:

What the client really wanted is an optimum asset allocation plan for the 12 years. There are two options: decentralized investment in stocks all over the world,or a classic “foolproof” asset allocation portfolio (consisting of 30% stocks, 15% commodities, and 50% long-term government bonds), which is more robust, conservative and thus more suitable, considering that the money was intended to be left to his child. According to historical data, from 2005 to today, the average rates of return of the two portfolios are 12% and 9%, respectively. Which one would you choose? I tend to select the first one, as the client has a very high risk tolerance and his money is open to long-term investment (12 years). Investing in stocks all over the world, especially stocks in emerging markets, means higher returns.

Results: If all goes well for the client in terms of his business and life in general during these 12 years from 2004 to 2017, the first option means an increase from 10 million to 31.91 million, while the second option (the strategy of selecting the world’s biggest hedge fund) means an increase from 10 million to 29.49 million. Simply put, the first option outperforms the second one, and the second one decreases by about 600,000 RMB today. In this sense, if you are patient and not greedy, the return on index funds may exceed that of the world’s biggest hedge fund. This is the long-term investment philosophy that everyone is promoting.

Calm and tranquil

Age

Return on world equity benchmark shares

Cumulative average return

Asset balance (10,000 RMB)

Allocated amount (annual progressive increase rate=3%)

Year

Age

Benchmark return on all-weather portfolio

Cumulative average return

Asset balance (10,000 RMB)

Allocated amount (annual progressive increase rate=3%)

1,000

2004

1,000

6

8%

8%

1,082

0

2005

6

15%

15%

1,147

0

7

30%

19%

1,408

0

2006

7

24%

19%

1,423

0

8

45%

28%

2,040

0

2007

8

24%

21%

1,765

0

9

-48%

9%

1,071

0

2008

9

-7%

14%

1,643

0

10

51%

17%

1,620

0

2009

10

27%

17%

2,081

0

11

11%

16%

1,792

0

2010

11

6%

15%

2,202

0

12

-14%

12%

1,539

0

2011

12

-3%

12%

2,146

0

13

12%

12%

1,729

0

2012

13

4%

11%

2,238

0

14

22%

13%

2,110

0

2013

14

-4%

10%

2,154

0

15

10%

13%

2,327

0

2014

15

17%

10%

2,514

0

16

12%

13%

2,611

0

2015

16

8%

10%

2,725

0

17

13%

13%

2,962

0

2016

17

8%

10%

2,944

0

18

8%

12%

3,191

0

2017

18

0

9%

2,949

0

Total

0

Total

0

Let’s further assume that the client’s company ran into difficulties in the global financial crisis of 2008, and its cash flow did not make it through 2008. After liquidation, he asked for an allocation of 600,000 RMB for living and starting a new business. However, from that day on, things never got any better, and he would draw 600,000 RMB every year. Calculated at an inflation rate of 3%, he drew a total of 6.1 million RMB in the period from 2008 to 2017. As a result, in the case of asset allocation, the account balance increased from 10 million to 20.3 million; in the case of investing in stocks all over the world, the account balance increased from 10 million to 20.15 million. The investment strategy did not change, but there was a deficit of 150,000 RMB. The main reason was that, in the case of asset allocation, 600,000 RMB was drawnwhen it fell by 7%; in the case of investing in stocks all over the world, 600,000 RMB was drawnwhen it fell by 48% in 2008. An expenditure of 600,000 RMB changed the outcome.

6%

Age

Return on World Equity Benchmark Shares

Cumulative average return

Asset balance (10,000 RMB)

Allocated amount (annual progressive increase rate=3%)

Year

Age

Benchmark return on all-weather portfolio

Cumulative average return

Asset balance (10,000 RMB)

Allocated amount (annual progressive increase rate=3%)

1,000

2004

1,000

6

8%

8%

1,082

0

2005

6

15%

15%

1,147

0

7

30%

19%

1,408

0

2006

7

24%

19%

1,423

0

8

45%

28%

2,040

0

2007

8

24%

21%

1,765

0

9

-48%

9%

1,039

60

2008

9

-7%

14%

1,587

60

10

51%

17%

1,479

62

2009

10

27%

17%

1,932

62

11

11%

16%

1,566

64

2010

11

6%

15%

1,977

64

12

-14%

12%

1,289

66

2011

12

-3%

12%

1,863

66

13

12%

12%

1,371

68

2012

13

4%

11%

1,872

68

14

22%

13%

1,588

70

2013

14

-4%

10%

1,735

70

15

10%

13%

1,673

72

2014

15

17%

10%

1,941

72

16

12%

13%

1,795

74

2015

16

8%

10%

2,024

74

17

13%

13%

1,949

76

2016

17

8%

10%

2,105

76

18

8%

12%

2,015

78

2017

18

0

9%

2,030

78

Total

610

Total

610

What if a greater amount were drawn?

If the amount drawn was 12%, the gap would have widened to 3 million.

12%

Age

Return on World Equity Benchmark Shares

Cumulative average return

Asset balance (10,000 RMB)

Allocated amount (annual progressive increase rate=3%)

Year

Age

Benchmark return on all-weather portfolio

Cumulative average return

Asset balance (10,000 RMB)

Allocated amount (annual progressive increase rate=3%)

1,000

2004

1,000

6

8%

8%

1,082

0

2005

6

15%

15%

1,147

0

7

30%

19%

1,408

0

2006

7

24%

19%

1,423

0

8

45%

28%

2,040

0

2007

8

24%

21%

1,765

0

9

-48%

9%

1,008

120

2008

9

-7%

14%

1,532

120

10

51%

17%

1,337

124

2009

10

27%

17%

1,783

124

11

11%

16%

1,339

127

2010

11

6%

15%

1,752

127

12

-14%

12%

1,038

131

2011

12

-3%

12%

1,579

131

13

12%

12%

1,014

135

2012

13

4%

11%

1,507

135

14

22%

13%

1,067

139

2013

14

-4%

10%

1,316

139

15

10%

13%

1,019

143

2014

15

17%

10%

1,369

143

16

12%

13%

976

148

2015

16

8%

10%

1,324

148

17

13%

13%

937

152

2016

17

8%

10%

1,266

152

18

8%

12%

840

157

2017

18

0

9%

1,111

157

Total

1,219

Total

1,219

If the amount drawn was 18%, the account which invested in stocks all over the world would be empty by 2015 and, by the time his child went to college in 2017, there would be no money left; in the case of asset allocation, there would be a balance of 5 million in the account.

18%

Age

Return on World Equity Benchmark Shares

Cumulative average return

Asset balance (10,000 RMB)

Allocated amount (annual progressive increase rate=3%)

Year

Age

Benchmark return on all-weather portfolio

Cumulative average return

Asset balance (10,000 RMB)

Allocated amount (annual progressive increase rate=3%)

1,000

2004

1,000

6

8%

8%

1,082

0

2005

6

15%

15%

1,147

0

7

30%

19%

1,408

0

2006

7

24%

19%

1,423

0

8

45%

28%

2,040

0

2007

8

24%

21%

1,765

0

9

-48%

9%

976

180

2008

9

-7%

14%

1,476

180

10

51%

17%

1,196

185

2009

10

27%

17%

1,634

185

11

11%

16%

1,112

191

2010

11

6%

15%

1,527

191

12

-14%

12%

787

197

2011

12

-3%

12%

1,296

197

13

12%

12%

656

203

2012

13

4%

11%

1,141

203

14

22%

13%

546

209

2013

14

-4%

10%

897

209

15

10%

13%

365

215

2014

15

17%

10%

796

215

16

12%

13%

161

221

2015

16

8%

10%

623

221

17

13%

13%

0

161

2016

17

8%

10%

499

161

18

8%

12%

0

0

2017

18

0

9%

500

0

Total

1,762

Total

1,762

Or, conversely, if the client was very successful and purchased other companies in 2008,his success in business brought in excess cash flow, so he made an additional investment of 6%. As a result, in the case of investing in stocks all over the world, the account balance increased to 43.66 million; in the case of asset allocation, the account balance increased to 38.68 million. If an additional investment of 18% was made, the difference would be more significant.

Winning at life

Age

Return on World Equity Benchmark Shares

Cumulative average return

Asset balance (10,000 RMB)

Allocated amount (annual progressive increase rate=3%)

Year

Age

Benchmark return on all-weather portfolio

Cumulative average return

Asset balance (10,000 RMB)

Allocated amount (annual progressive increase rate=3%)

1,000

2004

1,000

6

8%

8%

1,082

0

2005

6

15%

15%

1,147

0

7

30%

19%

1,408

0

2006

7

24%

19%

1,423

0

8

45%

28%

2,040

0

2007

8

24%

21%

1,765

0

9

-48%

9%

1,102

-60

2008

9

-7%

14%

1,699

-60

10

51%

17%

1,761

-62

2009

10

27%

17%

2,230

-62

11

11%

16%

2,019

-64

2010

11

6%

15%

2,427

-64

12

-14%

12%

1,790

-66

2011

12

-3%

12%

2,429

-66

13

12%

12%

2,087

-68

2012

13

4%

11%

2,604

-68

14

22%

13%

2,631

-70

2013

14

-4%

10%

2,573

-70

15

10%

13%

2,981

-72

2014

15

17%

10%

3,086

-72

16

12%

13%

3,428

-74

2015

16

8%

10%

3,426

-74

17

13%

13%

3,974

-76

2016

17

8%

10%

3,783

-76

18

8%

12%

4,366

-78

2017

18

0

9%

3,868

-78

Total

-610

Total

-610

Complete victory

Age

Return on World Equity Benchmark Shares

Cumulative average return

Asset balance (10,000 RMB)

Allocated amount (annual progressive increase rate=3%)

Year

Age

Benchmark return on all-weather portfolio

Cumulative average return

Asset balance (10,000 RMB)

Allocated amount (annual progressive increase rate=3%)

1,000

2004

1,000

6

8%

8%

1,082

0

2005

6

15%

15%

1,147

0

7

30%

19%

1,408

0

2006

7

24%

19%

1,423

0

8

45%

28%

2,040

0

2007

8

24%

21%

1,765

0

9

-48%

9%

1,165

-180

2008

9

-7%

14%

1,811

-180

10

51%

17%

2,043

-185

2009

10

27%

17%

2,528

-185

11

11%

16%

2,472

-191

2010

11

6%

15%

2,877

-191

12

-14%

12%

2,292

-197

2011

12

-3%

12%

2,995

-197

13

12%

12%

2,802

-203

2012

13

4%

11%

3,336

-203

14

22%

13%

3,673

-209

2013

14

-4%

10%

3,411

-209

15

10%

13%

4,289

-215

2014

15

17%

10%

4,231

-215

16

12%

13%

5,062

-221

2015

16

8%

10%

4,827

-221

17

13%

13%

5,999

-228

2016

17

8%

10%

5,461

-228

18

8%

12%

6,716

-235

2017

18

0

9%

5,707

-235

Total

-1,829

Total

-1,829

To sum up, there is absolutely nothing wrong with the understanding that asset allocation determines returns; however, close attention should be paid to several important aspects.

If your friends or clients think you are an expert in the industry and ask for your opinions about stock selection or pension provisions, please be especially cautious with the KYC link before giving your advice because your advice may have substantial bearing on their families’ future.

First, pay attention to risk measurement, and figure out the intended period of investment.

Second, thoroughly understand his expenditure arrangements. If he requires expenditure from this money, please note that the tortoise can outrun the hare in 99% of cases. This means that asset allocation is recommended if the client has expenditure requirements, as a portfolio with an average rate of return of 9% in the case of asset allocation can outperform a portfolio with an average rate of return of 12%.

Third, if he intends to make additional investments, the money should be entirely used for investing in stocks.

Wealth inheritance planning is strategic asset allocation

Long-term funds + equities and insurance

Expenditure planning

Rights and interests as priority

Short-term funds + fixed income

Compromises breed harmony

Honest actions achieve great goals

Cash cow

For the sake of your families, friends and clients’ lives, please refine your risk questionnaire, and do a better job in the KYC area, as there is no starting again in life.

In short, asset allocation determines returns but, for different families with different cash inflows and outflows, the optimum strategic asset allocation varies as well. For a salesperson who is in the business of planning family trusts for clients, “wealth inheritance is the source, while asset allocation is the water”.The benchmark portfolio is strategic asset allocation, but it takes time and energy to figure out how to set the benchmark portfolio.

Some people may say that life itself is too unpredictable. What should we do then? I think that, with regard to what’s predictable, we can go with asset allocation; with regard to what’s unpredictable, we can go with optimum asset matching. I’m looking forward to seeking continuous perfection with you.

All of us have families and careers to tend to, and sometimes we may have to draw some money in case of emergency. So when a friend comes to you with great reverence for opinions about which stocks and bonds to purchase, please calm down first, and at least prepare a detailed KYC form and ask him/her about their families, daily necessities and possible future expenditures. Basic and simple KYC questions like these constitute the basis of strategic asset allocation. The cornerstone of wealth inheritance planning is strategic asset allocation.

Having worked for over 20 years in the United Arab Emirates, I have always been fascinated by the clarity in direction demonstrated by the country’s leaders and their persistent efforts to execute their strategy in a swift and methodical manner.

During this time, the UAE – like the rest of the world – has gone through economic cycles of growth and contraction. But throughout it all, the country’s clarity in what it stands for and what it aspires to be has prevailed. The resolute focus maintained by the country’s leadership has helped the country to securely move forward by constantly making the necessary changes and taking corrective actions remaining at the forefront of innovation.

The UAE – Offering the ultimate platform for doing business

The current leadership of the country has set out to develop and expand the UAE as a regional hub for business, trade and tourism with an unprecedented modern infrastructure, whether that is in its physical elements (airports, road network, public transportation, etc.), legal framework (rules and regulations, investor protection schemes, etc.), a world class financial establishment or a resilient banking system.

It is clear that this ambitious goal is not just supported by the leadership, but that the vast majority of the Emirati population actively supports it, realizing that the success of their leaders’ vision will create wealth and growth opportunities for all people, particularly Emiratis who have become a minority group in their own country for the last decades, due to the massive influx of foreigners who flock to their country.

This unique drive and vision, combined with the unique nature of the UAE’s political structure, allows for swift decisions, allocation of resources, accountability and the development of ambitious mega projects. To the eyes of the first-time visitor, the cities of Dubai and Abu Dhabi rise from the surrounding desert as miraculous oases. Far from becoming blasé, the returning visitor continues to marvel at the astounding rate of change and growth that took place since their last visit.

Indeed, the UAE has achieved a level of infrastructure that is unprecedented for a country that is only 48 years old and would be extremely expensive and time consuming to replicate, whether the extremely effective airport hubs that manage record numbers of passengers travelling to or transiting through the UAE, to the ever expanding road networks, public transportation methods, all the way to the active promotion of culture and arts, entrepreneurship, gender equality, and adoption of new technologies.

In the UAE, I have witnessed how bank mergers, M&A activity, dispute resolutions and unique business creation have taken place with impressive speed and efficiency. The leadership understands that uncertainty is bad for business and they make sure they resolve and dissolve any ambiguities. I have lived through a swift adaptation of technology touching every angle of one’s activities in the UAE as the country makes sure that it firmly places itself at the cutting edge of innovation in order to maintain its competitiveness.

And the UAE has managed to accomplish myriads of costly changes and innovations, all the while maintaining a 0% corporate and 0% personal income tax. Instead, residents of UAE pay their share of their use of the country’s resources through a system of direct fees and a consumption VAT at a low 5%. This continues to represent a very low cost to investors and residents and continues to encourage lasting growth and profit.

Why setting up a Free Zone Company

This unparalleled focus on continuous growth and economic prosperity, combined with the proven commitment from the country’s leadership to provide a distinctively business friendly environment, makes the UAE a uniquely positioned jurisdiction to set up companies, whether they operate locally, regionally or globally, and to hold assets.

Apart from offering a full exemption from taxes that are so commonplace in all major economies, there are no exchange control restrictions and a full repatriation of income and capital is easily facilitated through the many international banks located in the country.

Establishing a Free Zone company in particular, offers advantages that – when compared to other UAE jurisdictions – makes this option to be the most attractive to foreign investors. As an example, unlike a Mainland company where a local sponsor is needed to hold 51% of the company’s shares, Free Zones, following a liberal foreign investments regime, allow 100% foreign ownership and therefore 100% control over one’s business.

Contrary to the traditional Offshore business, setting up a Free Zone company opens the way for becoming a resident of the UAE, a desirable option for individuals and entrepreneurs alike. Offering a thriving economy, a solid banking system, excellent infrastructure, a cosmopolitan lifestyle and, wrapping it all up with a zero personal tax, it is not surprising that the UAE has established itself as one of the top competitive jurisdictions to live in the world.

A Free Zone has multiple benefits – it can be set up quickly and easily and, given that it can freely operate not only abroad but also within the Free Zone, it adds a real economic benefit to the country. The mere fact that Free Zones issue residency visas and necessitate having a physical office space, gives more substance to the Free Zone setup than using the cheaper but - now more than ever- scrutinized offshore alternative. Free Zones are playing such an important role in international tax and residency planning, they can easily be presented in international trade and transactions as a solid legal and operating entity and demonstrate sufficient substance for domestic and foreign banks and tax authorities. A corporate and personal bank account which can be easily set up following the establishment of the company and the possibility to become a full fiscal resident, these are all invaluable assets to have.

Especially in today’s interconnected world, where people move and live in different countries, where one’s tax information sometimes has to go through multiple hands and systems and where a country’s tax code, more often than not, is unsophisticated or the political system corrupt, it is important that citizens of the world have a choice. A Free Zone company gives you that choice.

Conclusively, I am convinced that the interests of this country are aligned with the interests of the entrepreneurs and business builders, as the success of businesses in the UAE will reflect positively on the country itself. I have faith in the leadership and governance of the country to make the appropriate business friendly decisions to sustain its tax-effective model while still abiding by the global rules of transparency.

Once Jacobs established an American trust for his family in the United States, the esoteric term “Irrevocable Trust” suddenly become a household name.

To put it simply, money is donated to the trust, and if Jacobs cannot get it back, the creditors of Jacobs don’t get it either.

Is this Irrevocable Trust really so popular? What is the reason for the popularity? We heard about the Irrevocable Trust in the news, mainly because overseas trustsare associated with so-called “runaway” tycoons. Upon mentioning its name, everyone would immediately think of running away, and thinking of running away, they would think of asset isolation, and thinking of asset isolation, they would naturally think of “irrevocable”, so the popularity of the word “irrevocable” becamewidespread in the media. In real life, “irrevocable” is not necessarily so common.

Therefore, if you are not very clear about your trusts, you can temporarily set up a revocable trust. In this way, no matter how unreliable your own trust is, you can revoke it.

Let us return to the issue of Jacobs. When a trustee like Jacobs sets up a trust, he is really not able to use the money himself. Wouldn’t he be a bit worried?

What specific ideas are there in the design of this structure? Should it guarantee that the creditor will not escape, and it will not affect your use of the money? Here, I have listed five tips for designing “Irrevocable Trusts” based on my own experience,in the hope of helping trust practitioners to broaden their frame of mind.

Tip 1: Add the principals themselves to the list of beneficiaries and, if you need to use the money, you can assign it to yourself. Many people think that trusts must be beneficial to others,and it’s not possible that they benefitthemselves. In fact, this is a misunderstanding of the trust. When the beneficiary is you, it does not mean that the trust is invalid. For example: Mr. A has set up a trust, the beneficiary is himself, and the provisions stipulate that if A loses the ability to take care of himself, then the trustee must use trust funds to take care of A. The trust will only take effect if it is established in a territory that allows the principal to be the beneficiary. From the above clauses, we have seen the practical value of the self-benefit trust, which is not to evade any responsibility, but to let the creator provide himself with a future guarantee through the self-benefit clause. Of course, when the principal has the capacity to act, he can always allocate all or most of the trust’s funds to himself to achieve control over the trust.

Tip 2: If it is a discretionary trust, a protector can be established, and the protector has the right to decide when and under what circumstances the trust principalwill be allocated to what kind of beneficiary. Most jurisdictions allow the role of protector. Traditionally, the protector is a passive role, and only has the right to deny the investment and distribution of the trust. For example, Mr. A sets up a trust, and the beneficiaries are himself and his wife. The protector is A’s lawyer and friend. In traditional trust law,A’s lawyer can deny the trustee’s decision to split the trust assets in half with A’s wife. But modern trusts grant more rights to the protector. For example, A’s lawyer can give an order for the trustee to allocate 90% of the assets to A.

Tip 3: Establish a clause for reserved rights in the trust agreement. One of the reserved rights is to add and delete beneficiaries so that you can add yourself at any time even if you are not currently on the beneficiary list. For example, A has established an Irrevocable Trust, and the beneficiary is his wife and his son. After two years, A has another daughter, and A wants to add a beneficiary. When A has established a trust agreement, there are terms to say that he can add beneficiaries, so A can smoothly add his daughter in it. In the same way, if A has not included himself in the beneficiary list when he established the trust agreement, he can also add himself later.

Tip 4: In cases where the trust law permits it, you can set yourself or your agent as the investment manager of the trust, so that the principal has the final say in deciding the way to invest the trust funds. If it is a discretionary trust, the trustee generally does not agree with the investments in the industries suggested by the principal, such as XX electric vehicles, but if the trust agreement has already stated that the principal can manage the investment by himself under certain conditions, the trustee will not need to take any responsibility for the investment’s failure.

Tip 5: Use a PTC, namely a Private Trust Company. You can become the owner of a PTC; this can be achieved. It is an Irrevocable Trust, but control is still in your own hands. The PTC has become popular in the Asian market in recent years, where customers themselves become shareholders and directors of a PTC, or at least directors.At this time, although the role of a trust license may still need to be a director of the PTC or a special trustee to guarantee compliance, this director is already a “sleeping director”, because the client guarantees the right to change directors at any time through his own shareholders, or by acting as a director, to decide on major issues such as investment and distribution.

Combining the above five tips, we can summarize two key points about trust structuredesign:

Point 1: It is necessary to seize two cores,which are investment rights and benefits. From Points 1-3, we can see that we are talking about the right to benefit, but Point 4 is about the right to invest. Once the two issues of benefits and investments are resolved, most of the customer’s issues are resolved, and the remaining issues are usuallyonly small.

Point 2: Role adjustment will lead to structural adjustment: For example, Point 5 is to convert the traditional trust company into a PTC. Point 2 is to share the rights that the principal originally wants to retain from the protector.

The trust is a very flexible tool that can be professionally designed to meet the needs of a variety of situations. This is also the reason why trustsare one of the preferred tools for the high-net-worth family to choose for family wealth management.

Inheriting the historical symbol of the ancient Silk Road and following the principle of peace and development, China’s Belt and Road Initiative intends to actively establish economic partnerships with countries along the designated “Belt and Road” regions. It also intendsto jointly build a community of shared interests, shared futures and responsibility, featuring mutual political trust, economic integration and cultural inclusiveness. Encompassing over 60% of the global population, it will not only create new opportunities for the sustainable development of China’s economy, but also, more importantly, will change the political, economic and military landscape of the world.

Over the past few years, with the advance of the Belt and Road Initiative, the Middle East, the United Arab Emirates (UAE) and many other names are coming into our view.

When the Belt and Road Initiative was put forward by China in 2013, UAE was one of the Middle Eastern countries that actively responded to our call, and a founding member of the Asian Infrastructure Investment Bank (AIIB). Its advantageous location at an intersection along the Belt and Road area makes it a natural partner for jointly building the Belt and Road with China. The last five years have witnessed the consolidation of their cooperation in this field, and the strengthening of their economic and trade ties. In addition, UAE has remained China’s second biggest trading partner and biggest export market among Arab countries for many consecutive years; China is also UAE’s biggest trading partner.

Dubai, as a representative of cities in the Middle East, has also attracted the close attention of investors from all over the world.

1

International Metropolis

Best Destination for Real Estate Investment in the World

For many people, Dubai is only a land of luxury and wealth.

However, in recent years, thanks to its strong performance in finance and trade, Dubai has successfully gotten rid of its dependence on oil, and created a diversified economic pattern.

Wholesale &Retail Trade, 27.5%

Manufacturing, 9.5%

Financial Services, 10.6%

(According to Dubai’s economic statistics in 2017, the petroleum industry only accounted for 1.7% of the economy, while large proportions were taken up by financial services, wholesale & retail trade, real estate &infrastructure, and other industries.)

Dubai—World-Class Financial Centre

According to the Global Financial Centres Index, in 2018, Dubai seized 15th place in the ranking of global financial centers, above Paris, Geneva, Los Angeles, Luxembourg, Vienna, and many other metropolises.

According to a report released by the well-known real estate consultancy,Cluttons,at the end of 2017, Dubai’s housing prices had seen growth rates as high as 5.19%. As a result, Dubai surpassed London as the best destination for real estate investment in the world in 2017.

Economic and Commercial Section of the Consulate General of the People’s Republic of China in Dubai

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Dubai Becomes the Best Destination for Real Estate Investment in the World in 2017

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2

In 2019, Dubai is Still One of the Best InvestmentDestinations in the World

Here is some good news about real estate investments in Dubai:

Tourism Boom

According to Mastercard's 2018 Global Tourism Destination City Index (GDCI), Dubai has ranked in fourth place for four consecutive years. In 2018, the number of international tourists staying overnight in Dubai reached 15.92 million, and the hotel occupancy rate was 86.9%, with the highest spending power in the world.

In addition, it is estimated that Dubai International Airport will serve nearly 100 million passengers in 2020. The long-term prosperity of the tourism industry has yielded handsome dividends for the real estate market.

InfrastructureUpgrades

On January 1, 2019, Sheikh Mohammed bin Rashid al-Maktoum, Vice President, Premier and Chief of Dubai, approved Dubai’s public expenditure budget in 2019 to a total amount of 56.8 billion Dirhams(roughly amounting to 15.5 billion USD), intending to continue to transform Dubai into one of the most liveable cities in the world.

According to the Chief of Dubai, in 2019, Dubai will invest heavily in building World Expo facilities, and upgrading all kinds of infrastructure. This means that Dubai will become more attractive to investors, resulting in the rise of real estate value.

GDP Growth

According to the UAE macro-economic model analysis done by the Dubai Chamber of Commerce & Industry, supported by increased investment flows and personal consumption, the actual GDP growth of UAE in 2019 will reach 3.8%. To be specific, the actual GDP growth rate of the non-petroleum sector is estimated to be 4.1%, while between 2014 and 2018, it was only 2.8%.

In the next five years, the network of related business systems formed by transportation, telecommunications, construction, real estate, business services and tourism will provide strong momentum forUAE’s GDP growth.

Expo Dubai 2020

In 2020, the World Expo will be held for the first time in the Middle East/Africa/South Asia region. Expo Dubai 2020 will also be one of the grandest global events in the Arab world.

The event is estimated to attract more than 25 million visitors, about 70% of which will be foreigners. This is bound to provide tremendous impetus for Dubai's economic development.

Clearly, Dubai’s real estate market has very promising prospects.

3

Dubai’sHousing Prices are half that of Shenzhen, but its Rental Yieldsare as High as 10%

Relative to other financial centers in the world, Dubai still has low housing prices. At present, the average housing price in downtown Dubai is 30,000~50,000 RMB/m2, and in surrounding areas it is about 20,000 RMB/m2. Dubai’s housing prices are roughly one sixth of that of Hong Kong, and half of that of Shenzhen.

However, the rental yield of Dubai is surprisingly high! According to statistics, Dubai has an average annual rental yield of about 7.8% in ordinary areas, and a yield as high as 10% to 15% in hotspots. According to the rental data on metropolises in the world in 2017 released by Airbnb, Dubai ranked second worldwide, and demonstrated a rising trend.

(Average Rental Yield Comparison; Data Source: PropertyMonitor)

According to statistics released by Leyoujia, Shenzhen’s rental yield in 2018 was below 2%. Clearly, in this regard, Shenzhen lags far behind Dubai.

However, Dubai is similar to Shenzhen in that 90% of its population of Dubai are migrants, and the large number of migrants ensures a stable rental yield.Its room occupancy rate can reach as high as 87%, according to official data released by the government of Dubai.

(Palm Island, a Well-Known Luxury Villa Area in Dubai)

4

Completed Hotels in Core CBDs

Short Payback Period and Immediate Return

Here Park Regis, a luxury hotel in a CBD office building in Burj Khalifa District, is taken as an example for illustration. Besides a guaranteed minimum fixed rent, there is also an annual dividend of 95% of hotel revenue; the comprehensive rate of return on investment can reach between 13% and 20%. (According to a conservative estimate by HDR, the largest hotel rating agency in the world ①, the expected net return will reach 20.2% in the fourth year, and 20.96% in the fifth year.) As a completed project, the hotel will be opened to business in April, 2019, and there will be immediate return on investment then, so your funds won’t be tied up for nothing. There is also a freehold, which is inheritable and transferrable without having to pay any tax. In addition, investing in the amount of one million dirhams (equivalent to 1.8 million RMB) gives permanent residency to three generations of one family.

[Note ①: According to Mastercard data, in 2018, Dubai had a hotel occupancy rate of 86.9%; HDR measured a conservative occupancy rate of 74.6%.]

That is to say, recovering one’s costs within seven or eight years is quite easy. In contrast, it takes 50 to 60 years to recover the cost of a house, not to mention the absence of a freehold and the uncertainty of rental yields.

(Park Regis, a Luxury Hotel in Burj Khalifa District)

Besides high rental yield and low housing prices, purchasing real estate in Dubai also has the following advantages:

1) Freehold, and No Tax

Real estate in Dubai is freehold, and is inheritable without inheritance tax; there is also no capital gains tax or rental income tax.

2) Permanent Residency Gained from Purchasing Real Estate

Purchasing real estate in Dubai brings about a freehold, and investing in real estate in the amount of one million dirhams (equivalent to 1.8 million RMB) gives permanent residency to three generations of one family. This adds to the appeal of Dubai to investors.

3) Stable Exchange Rate and High-Risk Resistance

Dubai’s currency (dirhams) has a stable exchange rate with the USD, and has remained stable at around 3.667 for the past two decades, so it is equivalent to dollar assets. Compared to the RMB in continuous depreciation, a stable exchange rate with the USD can no doubt inhibit currency inflation and guarantee asset hedging.

4) Flexible Payment

Investors intending to purchase real estate in Dubai can apply for loans (50% at least, which is unavailable in most countries) at a low interest rate, and easily make repaying loans with rent a reality.

5) Refined Decoration and No Shared Residential Area

In Dubai, the housing area means the actual area used, without shared areas; in addition, most houses there are finely decorated, and most apartments are fully furnished.

6) International Education

There are 511 international schools in UAE, the largest number in any country. In terms of tuition, it is cheaper to go to school in Dubai than in China.

7) World-Class AccompanyingFacilities

There are also all kinds of facilities in Dubai, like the highest tower and the largest shopping center in the world, an international airport, international schools, international medical care, etc. Investors can enjoy top-end luxury life in Dubai.

8) Openness and Safety

As the second safest city in the world, Dubai has no foreign exchange controls, no purchase restrictions, and no political risk.

In 2018, several domestic media outlets ran the headline, “The era of global taxation is coming”, with regards to the implementation of the Common Reporting Standard (CRS). For many high net-worth individuals, CRS was a major buzz word in 2018. So, what is CRS exactly?

CRS is short for Common Reporting Standard. CRS is a standard for taxpaying citizens’ information exchange between different countries, developed by the Organization for Economic Co-operation and Development (OECD), requiring global financial institutions to offer the account information of citizens of a country to the tax authority of that country in accordance with CRS requirements. For example, if a Chinese citizen opens a bank account in Cyprus, the authorities of Cyprus are obligated to notify Chinese authorities of it, and vice versa.

As early as 2017, Hong Kong made an announcement regarding the implementation of CRS. On March 16, 2017, the Legislative Council of the Hong Kong Special Administrative Region announced the decision that it would officially implement CRS in 2017 and notify over 140 countries of all Hong Kong enterprises and tax residents’ account information at the beginning of 2018. With the implementation of CRS in China in 2018, it officially entered the “era of global taxation”.

II The Impact of Banking Policies on the Number of Incorporated Offshore Companies

What is the impact of the implementation of CRS in 2018 on the incorporation of offshore companies and offshore bank account opening?

As a Hong Kong-based licensed secretarial company and an overseas company service provider (Hangtung Holding Group Limited, Hong Kong Trust and Company Service Provider Licensee Number: TC006080), we have seen statistics showing that the number of Hong Kong companies which cancelled their applications in 2018 has increased. The number of offshore companies registering has maintained steady growth. (The official Companies Registry data shows that up to the end of 2018, the total number of local companies incorporated according to the Companies Ordinance in Hong Kong was 1,400,950, which is 17,004 more than in 2017). However, taking into account that some offshore company operators are afraid of the impact of the implementation of CRS, and that some banks have tightened their KYC policies (KYC being short for Know Your Customer, the institutional foundation for anti-money laundering and corruption prevention), the market demand for the establishment and sustained operation of offshore companies will decline.

According to the annual statistical analysis of company registration data in mainstream offshore jurisdictions like the British Virgin Islands, Cayman Islands, Marshall Islands, Bermuda Islands, Seychelles Islands, and Samoan Islands, the change and adjustment of policies on bank account opening have had an impact on the number of offshore company registrations. For some offshore company operators, whether it is possible to open a bank account has a direct impact on the normal running and continuing operation of their business. Therefore, whether it is possible to open a bank account is one of the elements that they have to take into account when considering incorporating an offshore company in a relevant jurisdiction.

III Banks’ Policies towards Offshore Companies’ KYC Policies

Based on their business requirements, offshore companies mainly have two options for opening accounts: one is to open a so-called offshore account at home, and the other is to directly open an account abroad. For customers from mainland China, the first option is to open an OSA account (Offshore Account), an NRA account (Non-resident Account) or an FTN account (Free Trade Non-resident Account) in China. The second option is to directly open bank accounts in Hong Kong, Singapore, or via a professional organization in the Cayman Islands or the Seychelles. Comparatively speaking, Hong Kong features an advantageous geographical location as well as more convenient communication, so opening a bank account for an offshore company in Hong Kong may be attractive to customers from mainland China.

Based on CRS policy requirements for banks, along with the regulatory requirements of different international organizations (such as the Financial Action Task Force on Money Laundering) and governmental agencies of different countries and regions, banks impose more requirements on KYC auditing and the subsequent supervision of offshore companies’ account-opening applications. These include identifying customers’ identity (including actual controllers and actual beneficiaries) and conducting due diligence on shareholders’ sources of wealth, companies’ specific businesses, and trading countries.

Some banks have been punished by local government supervision departments for insufficient due diligence. In 2013, for example, due to ineffective supervision of money laundering activities, some drug trafficking groups were caught laundering money via Hong Kong and Shanghai Banking Corporation (HSBC). The federal court in the United States finally decided to fine HSBC 1.9 billion US dollars. It became the largest fine on a single bank ever in the history of American banks. Besides the fine, HSBC also signed a Deferred Prosecution Agreement (DPA) with the US regulator. Enterprises which sign this agreement have to abide by a number of conditions besides paying fines. As part of this agreement, HSBC also needed to limit the bonuses for its senior executives to comply with relevant regulations. Additionally, HSBC was put under court supervision for as long as five years. (HSBC has already passed the five-year court supervision period.)

Based on the comprehensive review of policies of financial institutions that offer offshore company banking services in mainland China and Hong Kong in 2018, banks have tended to further tighten their account-opening policies for offshore companies and impose more requirements on customer qualification. Additionally, certain banks have also removed some existing customers through account reviewing procedures. Such circumstances have made a certain impact on the normal operation of both newly established and existing offshore companies.

IV What Do Offshore Companies Need to Pay Attention to When Opening and Maintaining a Bank Account?

According to CRS tax-related information, automatic exchange standards, and requirements on financial accounts, citizens need to truthfully declare their national resident tax number when opening a bank account in an overseas country or region. A citizen of mainland China, for example, has to present his or her ID card number.

If an offshore company wants to open a bank account, the bank will conduct due diligence (KYC) on it. On the customers’ side, they need to allow the bank to fully understand their background and business operations, in order to enable the account-opening manager to complete and submit an account-opening report to the examination and approval department, based on their company data. They may also need to provide explanations and supplementary information in time if the examination and approval staff have any questions.

For customers who already have a certain business scale and foundation, besides basic company data and personal data, they are also required to provide sufficient business data to enable the bank to understand their business operations. For example, if an offshore company established by directors and shareholders from mainland China chooses to open an account in a Hong Kong bank, besides basic company data, it also needs to provide sufficient data about its affiliated companies to prove its business background to the bank. The information that may need to be provided can include business licenses, account statements, auditor’s reports, upstream and downstream contracts, value added tax invoices, and freight bills or confirmed orders. To open an account in Hong Kong with a company incorporated in the BVI or the Marshall Islands instead of a Hong Kong company, the customer needs to be prepared to answer questions about why they chose to establish a company in this jurisdiction and still open a bank account in Hong Kong. For most customers, the foremost reason to establish a company in these jurisdictions is tax exemptions. However, this reason is not sufficient enough to persuade the banks to permit their applications. Based on our successful experience with referring customers to Hong Kong to open bank accounts, customers need to offer the bank a sufficient explanation based on their actual situations. For example, a customer chose to use a BVI company to apply for account opening services in HSBC Hong Kong mainly because the BVI company is convenient for managing directors and features low maintenance costs. In addition, if a BVI company doesn’t have an actual business in Hong Kong, it doesn’t need to apply for a business registration certificate (tax code) in Hong Kong for the time being. Through reasonable explanations, the company can pass any further examination and will be granted approval from HSBC.

In the event that a newly established enterprise chooses to use an offshore company to open a bank account, because it has no affiliated companies or other data to support its business background, banks may be stricter with KYC reviews. Such customers will need to offer more data regarding their business background as required by the banks where they’re applying for accounts. For example, a customer who has just resigned from a company and chooses to establish an Internet advertisement company in Hong Kong for future expansion to the overseas market. How can he or she make the bank adequately understand their business operations and procedures? This customer can provide the bank with his or her biographical information, service website, information about potential customers (upstream and downstream), and other data to deepen the bank’s understanding of their company, which will significantly increase the probability of passing the bank’s account-opening examination.

For companies which have already successfully opened bank accounts, every bank will conduct an account investigation and due diligence of customers on an annual or sporadic basis. Each year, a great number of customers’ accounts are closed by banks because the customers don’t realize the importance of their bank’s account investigation and fail to cooperate. This enables the banks to discover any problems with operations or other discrepancies.

What can you do to get through the increasingly tightened offshore banking policies? Firstly, customers should prepare sufficient background information. Then, they may seek assistance from professional consulting teams to improve account-opening efficiency.

]]>it@mxmedia.com.hk (Super User)OpinionsWed, 29 May 2019 00:00:00 +0000Brief Introduction to Offshore Jurisdictions– How an Offshore Company Should Choose a Place of Incorporationhttp://chinainvestin.com/index.php/en/china-offshore/opinions/3869/brief-introduction-to-offshore-jurisdictions-how-an-offshore-company-should-choose-a-place-of-incorporation
http://chinainvestin.com/index.php/en/china-offshore/opinions/3869/brief-introduction-to-offshore-jurisdictions-how-an-offshore-company-should-choose-a-place-of-incorporation

Offshore operations refer to operations in countries other than the place of incorporation. The so-called offshore company makes a general reference to companies which are incorporated in offshore jurisdictions in accordance with offshore company regulations, and which are only engaged in business outside the place of incorporation. Strictly speaking, “offshore company” is not an accurate legal term. An offshore company makes a general reference to a limited liability company or a company limited by shares established in offshore jurisdictions. As a form of commercial organization, offshore companiesare not limited to companies (whether limited companies, unlimited companies, holding companies, exempted companies, international business companies, joint-stock companies, public companies, etc.) but also include trust funds and partnerships.

Offshore companies are known by many evocative names, such as the “beautiful turning point” for getting listed via a roundabout route, the “soft treasure” of venture capital, the eclectic “land of change”, and the “fengshuiwonderland” of legal tax saving.These names tell us that offshore companies have all kinds of amazing charms, which is why they have become a focus for global investors.

When we talk about offshore companies, offshore jurisdictionsarealways an inevitable starting point. Since the middle and late 20th century, to encourage global trading and investment, some countries or regions set up special economic zones with particularly relaxed policies, where foreign individuals or legal persons were allowed to set up companies and operate in areas outside their territories. Therefore, such regions were also called offshore jurisdictions or offshore judicial districts. An offshore company refers to a limited liability company or a company limited by shares incorporated by non-local investors in offshore jurisdictions. Generally speaking, “offshore” implies that the investor incorporates a company in one place without appearing in person there, and conducts businesses all over the world outside of where the company is registered. Such regions are generally called offshore jurisdictions by international investors. The companies established by international investors in such regions are offshore companies.

Of course, for those who wish to establish a companyoverseas for investment in international trade or to manage their personal assets, choosing a jurisdiction for offshore incorporation requires several aspects of consideration – not only reasonable tax savings, international trade, intellectual property protection, capital operations, inheritance arrangements and overseas listings, but also in terms ofthe company’s high-level decision-making, legal areas, banking, and commercial affairs. Therefore, incorporating an offshore companyrequires comprehensive planning.

No matter whether an offshore company is established to make investments or for other purposes, when choosing the offshore company’s place of registration, the foremost element to be considered is the political and economic stability in the offshore jurisdiction. This is the first condition to be considered for minimizing registered offshore companies’risk. General speaking, the politics and economic situation are quite stable in offshore jurisdictions, because they are all prosperous and affluent island states. Secondly, we need to measure the soundness and development of professional institutions because all offshore companies require legal and accounting services. Therefore, such jurisdictions are required to provide law firms and accounting firms in accordance with international standards. Last but not least, local banking services have to be investigated. Most foreign companies can deal with banks all over the world, but many people choose to open accounts in the company’s place of registration. Therefore, a jurisdiction requires not only comprehensive banking services, but also accessibility to international banking facilities.

Besides this, an offshore jurisdiction needs a well-developed legal system and national legislation as well as modern transport and communication facilities. At present, many countries and regions have developed laws on offshore companies, which impose lower capital requirements and fewer obligations for legal registration and filing, andeither don’t require auditing of accounting records or offer the freedom to determine auditing requirements on accounting records. These regions permit the holding of directors’ meetings or shareholders’ meetings anywhere in the world to guarantee the confidentiality and full privacy of corporate business activities, and grant the issuance of bearer shares. Only through modern, flexible and well-developed legislation can different transaction and traderequirements be satisfied. These are required not only to protect enterprises, but also to enable enterprises to enjoy the preferential policies in offshore jurisdictions.

Registered offshore companies basically have three major characteristics, namely a high degree of confidentiality, less tax burden and no foreign exchange controls. Each offshore jurisdiction has its own advantages, but it is still necessary to choose an offshore jurisdiction that matchesthe company’s development goals.

Today, the world's best-known offshore jurisdictions include: Hong Kong, BVI, the Cayman Islands, Seychelles, the Marshall Islands, Singapore, and Bermuda. In the face of so many choices of offshore jurisdiction, choosing one that fits your own needs is key. The following examples show how an offshore company should choose its place of registration.

In recent years, the Variable Interest Entity (VIE) structure is the main way for an enterprise to get listed abroad. The common methods adopted by such companies are:

The founder or affiliated management team of the company sets up an offshore company. Generally speaking, each shareholder needs to set up a company in BVI or other islands (Most customers choose BVI companies because of their simple registration process and high degree of confidentiality).

Then, these companies and the VC, PE, and other shareholders jointly establish a company (usually a Cayman Island company), which functions as the main entity for listing.

The main entity for listing sets up a shell company in Hong Kong and holds 100% of its equity.

The Hong Kong company then sets up one or several wholly foreign-owned enterprises (WFOE) at home.

The WFOE signs a series of agreements with domestic operating entities, including the Equity Pledge Agreement, the Business OperationAgreement, the Equity DisposalAgreement, the Exclusive Consultation and ServiceAgreement, the Loan Agreement and the Spouse Statement. Through these agreements, the parent company which is incorporated in the Cayman Islands or British Virgin Islands (BVI) eventually controls the domestic company and its shareholders in China, operates the domestic enterprises, and distributes and transfers profits according to the will of the foreign-funded parent company, and eventually transfers the operating profits to the parent company overseas after paying taxes.

There is a new phenomenon among overseas listed companies and foreign investment in China. The source of foreign investment is mainly from companies in Hong Kong, where advantages like a well-developed legal system, simple tax system and low tax rate attract investors from all over the world. For entrepreneurs in mainland China, Hong Kong is a preferable choice of location. Because Hong Kong is also one of the freest trade areas on a global level, it is a suitable place to register these kinds of enterprises. Following it, BVI takes second place, and then the Cayman Islands. As a matter of fact, this round-trip method of investment –i.e. incorporating an “offshore company” in Hong Kong, BVI, the Cayman Islands or the Bermuda Islands and then coming back to mainland China to set up foreign-invested enterprises or achieve overseas listings and acquisitions – has become an “open secret”between many mainland enterprises.

For customers who are engaged in international trade, Hong Kong incorporated companiesaregenerally more suitable for foreign invested SOHO enterprises, factories and commercial companies, while incorporating an offshore company in an islandstate is more suitable for trading companies and the best choice for tax planning and preparing for initial public offerings. In such offshore jurisdictions, companies don’t need to file tax returns, declare dutiable goods or pay taxes to governments. The subsequent management is also simple and convenient. They just need to pay renewal fees at the time of the company’s annual audit each year. Also, the information about directors and shareholders is relatively confidential.

In today’s world of economic globalization and global capital flow, large PE organizations often accept funds from all over the world. For funds that focus on investment in China, these offshore jurisdictions are particularly attractive because they usually allow investors from different countries to participate in investment and they are not regulated by the laws and regulations of the US or China. Generally, offshore funds choose BVI, the Cayman Islands and the Bermuda Islands as the place of incorporation. Funds choose such regions as the place of incorporation mostly because such regions have a relatively loose supervision of funds and local governments exempt funds from paying taxes when revenues are not locally generated. Some jurisdictions also allow the fund to be publicly offered globally after its establishment.

Finally, companies that want to build international brands may choose larger countries like Britain, the US, France, Germany and Italy, the best places for anyone considering conducting transactions and operating enterprises. Due to the well-developed legal systems plus a sound economic and banking system, these countries are the first choice for investors who want to develop their business, build an international brand, and expand their market.

In addition, there are some common classifications in offshore jurisdictions, such as those directly exempt from taxes, those exempt from taxes based on bilateral tax treaties, and those offering free concessions.

Directtax exemption refers to the fact that some countries (regions) generally don’t sign double taxation agreements with any third country (region),thereby directly exempting all taxes, such as personal and corporate income taxes, capital gains tax, inheritance tax and property gift tax. Such jurisdictions include BVI, the Cayman Islands and the Seychelles Islands.

To exempt taxes based on bilateral tax treaties means that some countries (regions) have signed treaties on the avoidance of double taxation with many third countries and regions, so when parent companies incorporated in such jurisdictions invest in countries subject to such treaties, the capital gains tax can be tax-free or low-tax. The Seychelles Islands is such a jurisdiction.

To offer free concessions means that some countries (regions) don’t exempt income taxes or other taxes, but they might exempt taxes based on bilateral tax treaties, feature very free financial policies and preferential tax rates, and allow residents to be engaged in financial services. Such jurisdictions include Hong Kong, Britain, and Delaware US.

Categories of offshore jurisdictions are always intertwined within the dynamics of the global financial environment, so before choosing an offshore jurisdiction, sufficient preparations should be made, or professionals should be consulted in order to maximize the benefits.

]]>it@mxmedia.com.hk (Super User)OpinionsWed, 29 May 2019 00:00:00 +0000Analysis of the Advantages and Disadvantages of the Four Family Inheritance Patterns Text by: Li Weihttp://chinainvestin.com/index.php/en/china-offshore/opinions/3867/analysis-of-the-advantages-and-disadvantages-of-the-four-family-inheritance-patterns-text-by-li-wei
http://chinainvestin.com/index.php/en/china-offshore/opinions/3867/analysis-of-the-advantages-and-disadvantages-of-the-four-family-inheritance-patterns-text-by-li-wei

I Families and Family Inheritance

The so-called family is a group of people connected by blood or marriage, and the development from individuals to a small family (and then a big family) can be a complicated and long process. In order to be called a big family, the grouping mustconsist of at least two small families. Sometimes they are composed of a dozen small families after more than three generations of continuous development.

While it’s the wish of any family leader that his family prosper and flourish, the joint efforts of all family members and an effective inheritance from one generation to another is also necessary.

What are we talking about when we say “family inheritance”? Well, in this regard, people's opinions vary from person to person. Some people argue that it’s family culture or family spirit, while others point to family wealth (referring in particular to material wealth, hereinafter the same) or bloodlines. All of these opinions seem to be more or less right. In particular, inheritance viabloodlines should not be controversialbecause without inheritance viabloodlines, there is no point in talking about inheritance at all. For this reason, we will not go into detail about this type of inheritance in this article.

Regarding the relative importance of family culture, family spirit, and family wealth, different people have different views, and there are endless debates surrounding this topic. For me, the inheritance of family wealth is more important than the inheritance of either family culture or family spirit. Metaphorically speaking, without the skin (family wealth), how can the hair (family culture or family spirit) stand?

It’s fair to say that family culture and family spirit exist in all families, no matter how big or small they are. Even an ordinary family has its behavioral values that are passed down from generation to generation,and which ultimately constitute a portion of mainstream social culture. However, without the inheritance of family wealth, the members of the family will slowly drift apart, and it will be very difficult for a family to maintain cohesiveness, especially in this era of the information explosion and individualized cultural diversity.

I have conducted several experiments on different occasions. When asked to say the name of their father or grandfather, almost all the respondents can do so accurately. However, when it came to the name of their great-great-grandfather, none of them raised their hand. The next question was “If your great-great-grandfather had left you a lot of money, would you remember his name?”, and upon hearing that, everyone looked around with knowing grins. Someone even said that he would hang a picture of his great-great-grandfather on the wall in that case. This is really what we mean when we say that theeconomic foundation determines the superstructure.

Some people may raise objections by citing the example of some remote villages, where generations of relatives – although they are not wealthy – live together, have a common family culture, follow the same code of conduct, and form a big, stablefamily. In some cases, they even have common family wealth and a generally accepted patriarch. Is this the result of the inheritance of family spirit and family culture?

No. It is in fact a typical case of the inheritance of family wealth. It is true that families like this are not wealthy compared with others. However, in relatively isolated and undeveloped regions, they are relatively wealthy, and have gradually become the wealthiest groups and most important controllers of resources in these regions through generationsof inheritance and accumulation. In cases like these, each member of a big family receives continuous help and support from the family, and can thrive only under its protection. Thus, the increase in the number of family members testifies to the prosperity of a family thanks to the successful inheritance of wealth. On the other hand, the expansion of a family gives rise to increased contradictions and disputes, and in order to sustain the continuous and balanced development of the family, it has to develop its own rules, culture, and spirit, with which all of its members comply.

Social and economic development offers more opportunities for wealth creation and career development. Mobilized by these opportunities, some members of a united big family choose to leave, and make a living outside the family. As a result, families with less appeal to their members will gradually fall apart. In this case, neither family culture nor family spirit has gone through any fundamental change, and it is the change in family wealth that has weakened family cohesion. One after the other, they leave their big old family behind, and the members of these families become strangers in no more than three generations.

In this sense, family wealth, including accumulated wealth and the ability to create wealth, is the core of a family, while family spirit and family culture are essential elements that help to maintain family health.

II Formation of Modern Families

The Chinese mainland has a long-standing history of family culture. However, because of unique historical reasons after liberation, private wealth was almost entirely put under public ownership, and large, traditional families were almost all replaced by independent small families and loose kinship. Thus, family inheritance at that time was the inheritance of family culture and family spirit only, as there was no wealth left to inherit.

Since Reform and Opening-up in 1978, some people got wealthy first; with the continuous accumulation of personal wealth and the vigorous development of personal careers, these successful first-generation entrepreneurs changed overnight. On the one hand, the huge amount of wealth brought to them all kinds of preferential treatment and honors; on the other hand, they suddenly found themselves being surrounded by relatives who used to be distant and were now serving as helpers and managers in their enterprises. As a result, modern families based on these first-generation entrepreneurs began to take shape, presenting to us the phenomenon of modern family remodeling.

With the same story of family reshaping taking place all over the country, such families began to interact with each other, and form all kinds of cooperative and competitive relationships. To enhance family competitiveness, it was necessary to strengthen family construction, which further led to the birth of family culture through the setting of family vision and the cultivation of family spirit. Some families with great foresight even prepared a family constitution, and established a family committee.

Shenzhen, a city representative of China’s Reform and Opening-up, has just celebrated its 36th birthday, and these successful first-generation entrepreneurs in China have successively entered their twilight years. As creators and controllers of huge wealth (regardless of whether they are leaders of big families or heads of small families), they naturally hope that their immediate family members can unite as one and concentrate on expanding their families and family businesses on the solid foundation they have laid, and that each of their successors can have a successful career and a well-off life.

People say that “wealth iswater”, because water is a resource indispensable to human survival. However, while a suitable amount of clean water is a necessity of human survival, an excessive amount or any toxic dose may cause disastrous consequences. The same is true of wealth. According to conventional thinking, leaving the majority of the wealth accumulated through hard work (excluding normal expenditure and some used for social welfare) to descendants is a natural choice for the purpose of wealth inheritance. In this case, different wealth inheritance patterns yield different results, and this pattern selection has a direct bearing on the rise and fall of a family. The true test of the wisdom of each family descendant is knowing how to put family wealth under reasonable control through rational wealth inheritance planning and the effective allocation and use of wealth.

III Selection and Application of Family Inheritance Patterns

As discussed above, the inheritance of family wealth is the metaphorical skin, while that of family spirit and family culture is the hair. That is to say, the inheritance of family spirit and family culture is meaningful only when there is a proper inheritance of family wealth, and the mutual promotion between them helps to effectively strengthen family cohesion and sustain family development. In this sense, the inheritance of family wealth is accompanied by the inheritance of family spirit and family culture, and talking about the latter without paying close attention to the former means that family inheritance ends up being no more than nominal.

To take a panoramic view from ancient times to present society, family inheritance patterns have differed in their details, but on the whole, they can be classified into four categories: free-style, church-style, dynasty-style and incubator-style.The following is a detailed interpretation of the characteristics and applications of the above four varieties of family inheritance.

1.“Free-style” family inheritance pattern

This type of family inheritance pattern is the most common. Under this, the progenitor does not make any special arrangement regarding the wealth that he leaves, and the allocation of wealth (or lack of allocation) is a decision to be made by his successors. This is probably out of an understanding of and trust in his successors on the part of the progenitor, that is, he believes that they can do better in this regard; or this is because the progenitor passes away before giving any thought to this or making any arrangements. In the former case, usually there will be a proper arrangement; however, in the latter case, inheritance disputes are unavoidable.

A free-style family inheritance pattern is favored by a majority of families, as it is the simplest and requires no prior arrangement by the progenitor. In some cases, the progenitor does intend to make some prior arrangements, but later gives up on the intention, either because he has no idea about how to handle it, or because he believes that any such arrangement may put family relationships in jeopardy and that it’s better to leave it to his successors.

This free-style family inheritance saves the progenitor the trouble of making arrangements, but leaves a lot of troubles to his successors. This can very easily lead to inheritance disputes and family dissensions, or even big fights and the exposure of family scandals, unless all of the successors involved are open to reasoning and are willing to make compromises.

Even in the absence of inheritance disputes, this means of family inheritance only succeeds in dividing wealth left behind among various inheritors; as for what they are going to do with their respective portions (such as giving it to others, investment, entrepreneurship, gambling or squandering), it is none of anyone’s business. As a result, the so-called family no longer exists in this case. For an enlightened and open-minded progenitor, letting nature take its course is a choice, and thisfree-style of family inheritance suits him.

A common expression used by people adopting this free-style family inheritance pattern is “Your own children and grandchildren have their own good fortune!”

2. Church-style family inheritance pattern

A church-style family inheritance pattern is characterized by common belief and pursuit, and collective ownership of all properties, as priests are not allowed to own property.

Under achurch-style family inheritance pattern, the progenitor has equal and infinite love for his children, and expects them to jointly manage the family business, equally share family wealth, and always stick together through thick and thin. Regardless of what his successors may think, the progenitor never allows them to break up the family and live apart, not now, not ever.

What the progenitor emphasizes under this pattern is family solidarity and the sharing of common prosperity. This pattern applies to families with harmonious relationships among successors, which complements the situation. However, if his successors have difficulties getting along with each other, a system that arbitrarily ties them together may lead to a crisis. To say the least, even if they can get along with each other temporarily, it is still difficult to predict whether this harmonious situation can be sustained into the future.

It is true that a suitable legal framework of family trusts can fulfill the will of the progenitor, but, if his successors are not suited to running a business together, this arrangement will lead to intensified contradictions and internal strife, which will ultimately weaken the competitiveness of his family.

KwokTakSeng, founder of Sun Hung Kai Properties, invested his shares of Sunny World Group entirely in his family trust fund, and listed his spouse Mrs. Kuang and his three sons as beneficiaries; his wish was that his sons would pull together to develop the family business. In 2008, the three brothers turned against each other, and the strife was finally stopped by Mrs. Kuang by disqualifying the eldest son,Walter Kwok, as a beneficiary; however, the whole family was negatively impacted as a result. The root of this disaster was that Mr. Kwok selected a church-style family inheritance pattern.

A common saying among people adopting a church-style family inheritance pattern is: “Great things can be achieved, if we all work together!”

3. Dynasty-style family inheritance pattern

In ancient times, an emperor would usually select one of his sons as crown prince, i.e., the inheritor of his throne. When the crown prince ultimately became the emperor, the whole country would fall under his control; in turn, he would select one of his sons as crown prince when he got old. In this way, the other princes could only serve as lords, whose power could be removed by the emperor at will if they behavedbadly. This system guaranteed the successful inheritance of the dynasty and gave rise to the prosperity of the crown prince’s lineage, but other princes and their successors became vassals.

In a business context, a dynasty-style family inheritance pattern means that the progenitor has so profound a love for family business that he is willing to sacrifice anything (even marital happiness and the personal interests of his children) for the prosperity of the family business. Usually the progenitor selects the most capable child as the successor of the family business and pays close attention to the child, while neglecting other children who cannot make substantial contributions to the family business. When the progenitor passes away, the main assets of the family business are inherited by the designated successor, while other children only receive economic compensation.

Through the passage of time, the child inheriting and controlling the family business becomes stronger and stronger, while other children are gradually marginalized in the family. On the surface, a dynasty-style family inheritance pattern appears tofacilitate the inheritance of family wealth, or even carry the family business forward; however, for first-generation entrepreneurs, the family as a whole has failed to receive balanced development, and not every child can equally enjoy the family’s resources, which is a pity. For this reason, it is not family inheritance in its real sense, but only an inheritance of the family business or family business’s brand at best.

Some time-honored families in China have selected a dynasty-style family inheritance pattern. Their inheritance has lasted for more than three generations, but what’s been inherited is only the family business’s brand.

One expression that is common among people adopting a dynasty-style family inheritance pattern is: “What arewe without our company?”

4. Incubator-style family inheritance pattern

According to the definition in Baidu Encyclopedia, “incubator” refers to the equipment for artificial hatching of eggs. Since its extension to the economic field, it means to provide funds, management, resources, planning and other support to a businessduring the start-up phase or difficult situations, thus helping to expand or transform it.

An incubator-style family inheritance pattern involves the progenitor designing a reasonable inheritance plan that considers both the prosperity of the family business and the personal interests and capabilities of each successor. That is, the family incubator, by providing proper growth and entrepreneurial support to each descendant, not only sustains the continuous cohesion and solidarity of the family and the individualized development of each family member, but also achieves the inheritance of family spirit and family culture. It can be described as perfectly satisfactory.

An incubator-style family inheritance pattern does not pursue the inevitability of a family business’s inheritance. Many first-generation entrepreneurs have realized the accumulation of wealth through business operations, so they have special feelings for the family business, and wish that the businesses they started could be passed down forever. This is a simple wish on their part, but whether this wish can be fulfilled depends on several factors.

A.Development prospects and the family business’s ability to develop sustainably. Only a family business with development prospects or sustainable development ability is worthy of being inherited.

B.Whether the family business has been listed. For a non-listed company, it is necessary to assign a suitable family member as manager of the family businessso as to guarantee its continuous operation. Such managers can be a successor or descendent of the progenitor, or a professional manager under supervision by family members.

C.Whether the children of the progenitor are interested in business management and have related management skills. The inheritance of the family business cannot be effectively realized in the following three circumstances: the children are interested in the family business but have no management skills; the children have management skills but no interest; the children have neither interest nor management skills. In this case, it’s best that the family business be cashed out as financial assets for ordinary inheritance. On the other hand, the shares of a listed company pose a completely different issue.

For a family business thathas inheritance value and a suitable successor, it’s as if the progenitorhas won the lottery as he can appoint this person as the primary successor of the family business. As for the other children, they can develop their careers according to their interests and capabilities by receiving the same financial and resource-based support.

However, while the above arrangement has facilitated the successful handover from first-generation entrepreneurs to second-generation entrepreneurs, it is not really what we call family inheritance. The children of the progenitor may go broke, experience a marriage crisis, or die young. In addition, the way they may choose to arrange their wealth is also a factor to be taken into account by first-generation entrepreneurs in preparing inheritance planning. Thus, family inheritance in the real sense must give due consideration not only to the allocationto the second generation, but also to the third, fourth and further generations to come, so that all descendants can receive help and support from the family. In this regard, an incubator-style family inheritance pattern is no doubt an ideal choice.

One of the most prominent characteristic of an incubator-style family inheritance pattern is in the fact that it does not allocate family wealth entirely to children; instead, it sets aside a portion as family assets, and establishes a family fund in the form of family trust. This family fund is prepared for future descendants, and independently managed by a third-party credit institution for wealth management and value-added investment.

Upon the birth of a new family member who is related by blood, the family trust fund provides a certain amount of growth, education, health, and marriage funds for the new family member according to the allocation rules agreed upon. When this new member has reached an age suitable for entrepreneurship, the family fund offers another considerable amount of entrepreneurial funding, so that he or she can develop a career in their personal interest (as long as it passes an audit by the family trust fund’s auditing committee and does not violate any rules set by the client). In addition, a family member undergoing significant difficulties can also receive life insurance and re-starting support from the family fund.

The family trust fund is like an incubator for the growth and entrepreneurship of new family members, and it offers support to them during growth and entrepreneurship without compelling them to carry on running a business started by their progenitor. That is, they can pursue their own interests due to the support offered by the family trust fund. Personal interestsare the best teacher and a constant source of motivation, so successors that fall within this arrangement are more likely to build successful careers.

Traditional inheritance patterns tie all successors together onto the same big tree, the health of which has great bearing on everyone involved. In contrast, an incubator-style family inheritance pattern not only retains the business started by the first-generation entrepreneur by giving due consideration to the traditional demands of inheritance of the family business, but also offers continuous support to every new family member by establishing a family trust fund, so that more family members will start more new family businesses. That is to say, while family members are still arguing over the original tree under traditional inheritance patterns, an incubator-style family inheritance pattern has helped successors effectively build a forest and truly realize sustainable family prosperity.

In addition, a family trust fund not only offers growth and entrepreneurial funds to family members, but also supports the education, health, culture, charity, entertainment, and other functional expenditures of the whole family; it is the unifying aspect for all family members. Under this arrangement, no matter how far family members are away from each other, they can always be gathered together by a series of family activities, and can enjoy the honor and pride of the family.

In this regard, Li Ka-shing’s approach is very representative. While choosing the more conservative Victor Li as the primary inheritor of the family business, he has also helped his second son Richard Li build a digitaltelecoms kingdom with equal amounts of funds and resources, so that both of his sons can have the best arrangement to suit their personalities. In addition, he has established a family trust fund (which holds a considerable proportion of shared family wealth) to meet the demands of the family. Ancestral temple culture in ancient China also has the nature of an incubator-style family inheritance pattern.

A common saying of people adopting an incubator-style family inheritance pattern is: “Home is the warmest shelter in the world.”

IV. Conclusion

With more and more first-generation entrepreneurs reaching or exceeding their retirement age, combined with the advent of inheritance tax on the Chinese mainland, inheritance is becoming a topic of great concern for many families.

So, what can you inherit, and how?

Inheritance must not only protect the status and authority of first-generation entrepreneurs within the family, but also give due consideration to the capabilities of second-generation inheritors, the possibility of marriage change, the risk of debts, the possibility of squandering, and the possibility of family estrangement due to improper allocation, as well as the interests of more generations to come. After all, these are all generations related by blood – and therefore equally important – to first-generation entrepreneurs.

As the creator of family wealth, a first-generation entrepreneur enjoys an authority no one dares to challenge in the family; however, if the planning and arrangement made by him cannot be effectively implemented after his death, all his efforts will be wasted. For this reason, the arrangement of inheritance issues must be made using the law as a tool, especially family trusts. In fact, family trustsare a tool widely used by successful businessmen and wealthy families all over the world for the purpose of wealth protection and inheritance, and a secret weapon highly favored by many notable families, like the Rockefellers, the Kennedys, the L'Oreals, the Nobels, etc.

According to the provisions of the Trust Law of the People's Republic of China, after a client dies, the trust shall remain valid as long as there is a beneficiary. In other words, the arrangement of family wealth and the restriction on beneficiary behavior by the client through the provisions of family trust shall be protected by law even after his death, and be implemented by the entrustee according to law under supervision by the supervisor; there is no deadline and, in case of a violation, legal sanctions shall be imposed.

Family inheritance means the inheritance of wealth, culture and spirit, and more importantly, the inheritance of responsibilities and love. Regardless of the specific pattern selected, to ensure family inheritance, it is always necessary to prepare a careful plan, and guarantee the thorough, continuous, and faithful implementation of the will of the progenitor.

- END

(Author: Li Wei, Founder of Milan Bella Family Office and Chief Advisor of Family Wealth Protection and Inheritance)

For many people, Switzerland is both miraculous and mysterious. In films, we frequently see scenes like this: one of the richest people in the world walks quietly into a private bank in a street corner in Switzerland, where he has deposited a hefty chunk of cash.

Switzerland has a national territorial area of more than 40,000 km2. It is a little larger than Hainan Province, a little smaller than the Ningxia Hui Autonomous Region, and about half the size of Chongqing, China. Switzerland has a population of over eight million, which is equivalent to the population of Shandong Province’s Jining city. In this sense, it is really “a small country with a small population”. However, Switzerland is well-known for its numerous mountains and lakes and its beautiful natural scenery, and is widely recognized as a sort of paradise, with high incomes, abundant wealth and beautiful landscapes. It has been called “small, but rich and beautiful”.

However, when it comes to its economic characteristics, Switzerland is more than an international private wealth management center.

Treasury of the world’s wealthy

Private wealth amounting to trillions of American dollars from all over the world is managed by financial institutions based in Switzerland. As a country in the Alps that is highly favored for its political neutrality and economic stability, Switzerland has become the well-deserved champion of the private bank management industry.

Geneva is the cradle of the global private banking industry, and shares a reputation with Zurich – the “capital of commerce” – as one of the “Twin Stars” of Switzerland. Switzerland has a total of more than 140 private banks nationwide, and over one fifth of job opportunities in Zurich are provided by private banking institutions or related industries.

The fact that Switzerland became an international private banking center might be considered a case of being in the right place at the right time. In the 16th century, Protestants were persecuted in France, so they fled to Switzerland, taking with them their enormous wealth and wealth management experience. This was the birth of the first generation of private bankers in Switzerland. During the two world wars, Switzerland took advantage of its identity as a neutral state, managing immense amounts of money that flowed in from various countries. Relying on the scale of its private banking, it soon built up its position as the champion of the global private banking industry.

In terms of location, Switzerland is geographically the absolute center of the European continent. Surrounded by three major economies in Europe (France, Germany and Italy), Switzerland divides its territory into four language areas. These factors serve as the best natural ties.

With regards to its people, the Swiss have combined the merits of the Germans and the French. They are precise, reliable and conservative; they keep a low profile, and are discreet when it comes to wealthy people’s personal affairs. These are all ideal qualities for financial management, valued by the wealthiest people around the world, and interpreted perfectly by the behavior and character of the Swiss.

In fact, Switzerland has introduced legislation (i.e., the Financial Secrecy Law) to ensure that their clients’ financial information remains confidential. The Financial Secrecy Law requires all bank clerks to protect financial information’s confidentiality, or they will be criminally liable. The Financial Secrecy Law is regarded as the cornerstone of the Swiss private banking center. In 2014, Switzerland joined the Standard for Automatic Exchange of Financial Account Information agreement, which affected the authority of the Financial Secrecy Law. However, Switzerland's private banking industry is deeply rooted in its level of service and financial management. No other country or city in the world compares in terms of service level and wealth management scale. Hong Kong, Singapore and Dubai have raced to try and keep up with Switzerland, but have failed.

While the Americans used to control both petroleum and money, the Swiss now control the commodities represented by grain and the world oil trade, so it’s fair to say that the latter now controls half of the globe.

In fact, every aspect of our life – from things as small as food and clothing, to something as big as the economy – is closely related to commodities. Commodities can be divided into three major categories: 1) agricultural products, like grain, oil, cotton, sugar, coffee, cocoa, rubber and other economic crops; 2) metals, such as gold, silver, copper and iron; 3) energy and chemicals, such as petroleum products, coal and alcohol. Given that commodities are at the forefront of industrial production and that price fluctuations directly influence downstream products and overall economic operations, their importance is self-evident.

In this sense, whoever controls commodities also controls the world, and makes huge profits. The decade from 2000 to 2010 was the golden age of the commodity industry. The world's top commodity traders accounted for nearly US$250 billion, far exceeding the Wall Street investment bank in the same period, and surpassing commercial banks in the same period, becoming the most profitable in the world.

In 2012, within the global volume of bulk commodities, crude oil that was traded in Switzerland accounted for 38%, agricultural products accounted for 38%, and metal minerals accounted for 59%. According to estimates by Swiss National Bank, the total transaction volume of Swiss bulk commodities in 2010 reached 762.9 billion Swiss francs, with a profit of about 20 billion Swiss francs. It contributed 3.5% to national GDP, equivalent to that of the mechanical manufacturing industry (one of the pillar industries of Switzerland) and exceeding the tourism industry.

The key to the profitability of commodity traders comes from their extensive global information network, which controls all the links in the supply chain, from the supply of raw products, through intermediary trade, to the delivery of end products.

The Swiss Traders Association assigns people to check cocoa stocks in Côte d'Ivoire, or set up cameras in Japanese power companies to record the level of coal stocks. Swiss dealers know more about price changes and regional differences than any other industry and company, and sufficient information guarantees huge profits.

From a certain point of view, the commodity industry is similar to the financial industry, as they both rely on information and financial advantages for making money. In this sense, Switzerland provides the best conditions for commodity dealers.

First, Switzerland has a “loose” supervision system, as demonstrated by the extremely straightforward phrasing used by the Swiss government in a recent report: “Theoretically, spot commodity dealers are not subject to any regulations.”

Second, Switzerland has very low tax rates. Crude oil and mining companies worldwide pay an effective tax rate of between 30% and 45%, and banks on Wall Street have an effective tax rate of about 20%. In contrast, commodity traders in Switzerland, Cyprus, the Netherlands, Singapore, and other countries have an effective tax rate of 5% to 15%.

As far as commodity trading is concerned, Switzerland is like the American West during the “Westward Movement”, where there are fewer constraints and abundant opportunities.

An economic public interest organization once asserted: “The commodity trader industry (to the outside world) is still a black hole.” Glencore, Switzerland's largest commodity trader, is also the world's largest commodity trader, and has done business with Sudan and Iran against the recommendations of the US. The experience of its founder, Marc Rich, is quite legendary. He was sentenced to 200 years in prison in the absence of US justice and was later pardoned by US President Clinton.

Switzerland's leading position in commodities and its advanced banking industry bring out the best in each other. Banks play a pivotal role in the financing of the global commodity trade.

According to the Swiss Bankers Association, in 2011 the trade volume of raw materials handled by banks in Switzerland was as high as 1.5 trillion US dollars, which is equivalent to a quarter of the total global raw material trade credit line. Switzerland has taken the lead in this highly profitable business line.

Both “quick money” and “slow money” are earned

Some people think that Hong Kong is a relatively obvious example of the shifting of certain industries in the financial center and the hollowing out of industry. However, Switzerland not only has an advanced financial service industry, but also has a strong industrial force.

Its economy is internationally competitive, and based on the service sector. The tertiary industry (the financial service industry) accounts for 70% of the total number of persons employed by industry, while the secondary industry (industrial manufacturing) and the primary industry only account for 25% and 4%, respectively.

The job opportunities provided by the secondary industry are mostly in the fields of mechanical engineering, electronic engineering and metal processing. High-tech industries also play an important role in the Swiss economy. The important economic branches include biotechnology, medical technology, health care products, cosmetics and environmental technology.

Switzerland has an export-oriented economy. Export trade accounts for half of the economic income of Switzerland, and its main trade partners are various member states of the EU. Profits in machinery, electronic engineering and chemicals account for more than half of the total export income of Switzerland.

Looking at Switzerland from a bird’s eye view, two-thirds of the country is forests, lakes and glaciers, plus 1.6 million cows. Yet it is among the world’s top five foreign exchange earners, with a per capita annual export volume of 34,000 USD – more than twice the average of the “Four Asian Tigers”.

Having a “non-smoking” financial industry that occupies little land and generates quick profits, no wonder Switzerland doesn’t have to invest a lot of effort in developing industries.

In fact, there is an interdependent relationship between industry and finance because, without support from local industry, there would be no sustainable momentum for the local financial industry. Actually, excellent performance in industrial operations is icing on the cake for the financial industry.

In addition, the people employed in the financial industry are mostly rare talents with high levels of education, which determines that it will never be a pillar industry in terms of creating job opportunities. In contrast, industry creates the most stable job opportunities, and serves as the “stabilizer” of employment in the country. As a matter of fact, Switzerland’s unemployment rate rarely drops below 4%, even in a global economic downturn.

Switzerland not only makes “quick money” from banking and commodities, but also makes “slow money” from industry.

Innovation first

Switzerland has a small population of a little over 8 million, and, without its own natural resources, commodities and labor are very expensive. Among the Swiss, there is a common understanding: “We must compete on quality and innovation, instead of prices.”

According to The Global Competitiveness Report 2017-2018 which ranks 137 economies worldwide, Switzerland has been the most competitive economy in the world for nine consecutive years.

Switzerland’s annual R&D investment has been maintained at a level of 3% of its GDP, coming out top among developed countries. Measured by the ratio of the number of patent applications to population, Switzerland is number one in Europe.

In 2015 alone, there were 873 patent applications per million inhabitants in Switzerland. The Netherlands and Switzerland ranked 419 and 392 respectively, coming second and third.

The ideal R&D environment in Switzerland has also attracted top scientists from all over the world. According to statistics, there are 11.2 scientists in every 1,000 people, and the proportion of foreign scientists has reached 31.9%. Switzerland ranks fifth worldwide for the number of Nobel Laureates per capita.

Besides all of this, Switzerland also has many other champion industries, from the frequently-seen computer mice, watches, cheese, chocolate, Swiss army knives, and drones, and through the less frequently-seen fragrances, hearing aids, precision machinery and automation equipment, banks, pharmaceuticals, conventions and exhibitions.

Innovations in small and medium-sized enterprises have bred a number of less visible global champions. In Switzerland, one in every ten small and medium-sized manufacturers is a market leader; in particular, in the field of precision instruments, nearly 60% of enterprises are unseen market leaders. By virtue of these factors, Switzerland has the business competitiveness of a country with a population of 80 million. For instance, each country has its bank notes, but none of them can do without Switzerland. It is home to the world’s biggest supplier of banknote printing ink, foil and paper.

Swiss enterprises value “precision” and “uniqueness”. Taking the banknote industry as an example, this niche market has a low, but stable, growth potential; it is also an industry with a high cost, a high price, and a high threshold to entry, with few competitors.

Coffee offers another example in case. On the one hand, Nestle, a Swiss multinational food giant, has developed capsule coffee; on the other hand, a small-sized Swiss enterprise has won a special honor in the world. While competing with each other intensely across the globe, both Starbucks of the US and Costa of the UK have selected coffee makers manufactured by Thermoplan, a small-sized enterprise based in Switzerland.

A country of multinational corporations

The status of Switzerland as a country of multinational corporations is inseparable from its superior financial environment, strong sense of innovation and hard-working people. In the 2018 Global Fortune 500 list, there were 14 Swiss enterprises. In terms of the number of multinational corporations per capita, Switzerland ranks second in the world, behind Sweden.

Swiss enterprises on the Global Fortune 500 list in 2018

World ranking

Name of multinational corporation

14

GLENCORE

69

NESTLE

142

ZURICH INSURANCE GROUP

169

ROCHE GROUP

203

NOVARTIS

257

SWISS RE

306

UBS GROUP

341

ABB

366

ACE LIMITED

373

CREDIT SUISSE

412

COOP GROUP

415

MIGROS GROUP

441

ADECCO GROUP

444

LAFARGE HOLCIM

Data source: Fortune magazine.

Meanwhile, more than 1,000 multinational corporations have established their global or regional headquarters in Switzerland, via which they manage their businesses all over the world. Switzerland has become a well-deserved “country of multinational corporations” with more than 60% of US multinationals, including General Motors, Hewlett-Packard, IBM, Procter & Gamble, and Google all headquartered in Switzerland.

The fact that so many multinationals are headquartered in Switzerland is generally attributed to its preferential tax policies. The total tax paid by Swiss companies accounts for about 25% of their net income. In this respect, only Ireland and a few other countries are comparable to Switzerland. In fact, if a multinational corporation establishes a business control center in Switzerland, it will be able to cut its tax rate to between 6% and 10%. In January 2006, US food giant Kraft Foods announced the decision to transfer its European headquarters in London and Vienna to Zurich. At that time, UK corporation tax was as high as 28%, while Kraft's tax rates in Zurich began at 15%.

Besides the tax categories specified by the Swiss Federal Government, various states of Switzerland each have their own tax laws and power of taxation. In most states, tax registration is not open to public supervision, and holding companies are sometimes entirely exempted from income tax. For some remote states in Switzerland, using tax leverage to attract enterprises can be a solid choice.

Since the signing of the free trade agreement between China and Switzerland, more and more Chinese enterprises such as Huawei, China Grand Enterprises, Air China and FIYTA are establishing branches in Switzerland, and using it as a gateway to Europe. This move has proved to be very fruitful for them. In the future, even more Chinese enterprises are expected to be attracted by the unique business environment and geographical advantages of Switzerland for new development opportunities.

There are institutions for high-net-worth families constantly emerging in the third-party service market for Chinese family-owned enterprises. Whether it is a family office, a private bank, an accounting firm, or a law firm, at their core these institutions are mostly focused on family wealth management. Before delving into wealth management, we first need to understand the current stage of development of the Chinese family within the investment industry and the challenges involved. For the time being, we can't directly apply ready-made solutions that work for other markets. It is only effective and meaningful to develop products and services while bearing the current state of Chinese families in mind.

Wealth allocation for Chinese entrepreneurs requires a joint effort from the family and institutions. Families need to have a clear idea of their own goals and a clear understanding of their own abilities, which will help them choose the appropriate professional institutions as partners in accordance with their own characteristics, in order to effectively manage family wealth.

Families should fully understand themselves before making asset-related decisions

Having a clear plan for offense and defense is very important when allocating assets. In most cases, family investors are in a state of pure offense or do not know whether to take a more offensive or defensive approach. Is the family suited to a more offensive or defensive strategy, or a balance between the two? This issue can be analyzed from two perspectives.

The first perspective is necessity – that is, from the perspective of the family, whether investment is necessary, and via what kind of approach.

The second perspective is operability – that is, if the family has the capacity to make the desired investment. Necessity does not mean that it can be done. Anyone can make an investment but there’s no guarantee it will be handled well.

We always remind families to pay attention to the issue of operability, because each family's ability is limited. As a buyer, families need to clarify these two issues when considering the investment layout.

(1) The relationship between invested assets and the family itself

When choosing an asset, families should consider whether or not they understand the risks and overall scope of the investment, and if this investment opportunity suits their family or not.

For example, if the family is engaged in a traditional industry, then is it still necessary to invest in traditional industries? Which is more important – risk hedging or business synergy? Having a professional come in to assist you by assessing your options (and not make the decision for you) may be required.

Another factor is: what kind of investment opportunity does the family face? Is the information presented on the surface consistent with the substance of the investment target?

Only after understanding these two issues can we consider the relationship between the family and the investment. A good investment should be a suitable investment and not just an investment with high expected returns.

(2) Distribution between buyers’ and sellers’ assets

Most of the investment opportunities in the market are essentially positioned by sellers, not buyers. There are few investment opportunities positioned by buyers, but the family is the ultimate buyer and should consider more investment with strong buyer positioning.

When we assist families in screening investment opportunities, we are more inclined to pay attention to whether the assets themselves have strong buyer attributes.

What is the meaning of a buyer attribute? Take investment institutions for example. Their difference lies in the fact that their business model is to earn profit by helping customers buy good assets or by selling products to customers. The business model and operating mechanism of the asset itself determines whether its buyer or its seller attributes are stronger.

(3) Distribution between active and passive management

The “active” mentioned here refers to whether the family should be deeply involved in the invested assets’ management process. The important difference between family investment and non-family investment is that a family has a lot of resources to use, which is often forgotten. These resources also play a very important role in inheritance.

If resources can play a role in the investment process, especially in post-investment management, then the same investment held in the family’s hands is much less risky than in others’ hands.

(4) Find the boundaries of the circle of capability

The last issue is where the boundaries of the investment capability is, which is an issue of feasibility. Roughly speaking, these capabilities can be divided into five types. The first is the ability to find a "good" project by family standards; the second is the ability to judge whether the project is "good” or not; the third is the ability to obtain this "good" project; the fourth is the ability to manage a "good" project well; the last one is the ability to hold onto a "good" project until the project brings the expected returns.

The relationship between domestic family offices and family investment decision-making

The domestic family office market is still at a very early stage, and the business rules and models are still in the process of taking shape. In this area, both financial institutions and family offices like us are still exploring.

As an independent third-party family office, we would like to share with you some of our past experiences and the lessons we have learned.

(1) Do not recommend investments that a family does not need

Don't recommend something that the family office thinks is good for the family, but recommend something that the family thinks is good in and of itself.

This is a matter of common sense, but it is also a mistake that we have made ourselves. For example, one attempts to apply the service concepts of the world's leading family offices to domestic customers, but with no noticeable effect.

The reason is that overseas services and products are aimed at a fourth or fifth generation overseas families, while the domestic family is currently still in the first or second generation.

Family needs in different inter-generational periods are completely different. In addition to the inherent characteristics of the Chinese market, the blind application of international experience will result in mismatches in time and space dimensions.

(2) Take advantage of the trend and don't be a know-it-all

Just as the development of China's economy is based on the advantages of latecomers, in the field of family services, there are also many pioneering countries and regions, such as Japan, Taiwan, and Hong Kong.

In the family inheritance and family office business, there are many straight and winding paths, and they have all been walked before.

Today, it’s also very difficult for China's family service market to bypass the laws of the industry's development. Therefore, it is more realistic for us to first determine at which point in these industry trends we are, instead of focusing on how to work hard.

(3) Risk-controlled defense as a foundation

We hope to help families to participate in the investment business on the basis of controlling risks. The external situation is currently still in a state of high complexity and uncertainty, so there’s no doubt that having control over uncertainty should be a priority. There is no doubt about that.

The best way to control future risks is to create the future. Even if you play it defensively, this is a positive form of defense, not a failure to do anything. Risks will not automatically disappear because of inaction.

We are looking forward to working with our clients, and we are very interested in how we can help them shape a controlled future for their family. Among the three things we discussed, “defense, offense, and inheritance”, we always put "defense" first. Only go on the offensive after building a strong, defensive foundation and avoid taking unnecessary risks.

(4) Talent is king

After talking with the family about what to do, we still have to figure out if there is anyone who can actually do it. It is very likely that no one in the family can. The most common problem we have encountered in family inheritance is an extreme lack of talent.

The most important aspect of a family business is having middle-level cadres, which Chinese companies in particular think very highly of. Family management also needs "middle-level cadres".

Some families are prone to having problems when they reach the second generation. This is not only a problem of lack of ability within the second generation, but also a problem of lack of ability within the team around the second generation. Without a reliable talent pool, the family will inevitably fall into recession. On the issue of family talent, we are also actively developing solutions and have already begun some positive practical work.

]]>it@mxmedia.com.hk (Super User)OpinionsWed, 29 May 2019 00:00:00 +0000How to Plan for Corporate Income Tax and Personal Income Tax in China in the Post-CRS Erahttp://chinainvestin.com/index.php/en/china-offshore/opinions/3861/how-to-plan-for-corporate-income-tax-and-personal-income-tax-in-china-in-the-post-crs-era
http://chinainvestin.com/index.php/en/china-offshore/opinions/3861/how-to-plan-for-corporate-income-tax-and-personal-income-tax-in-china-in-the-post-crs-era

In the post-CRS era, when Chinese entrepreneurs intend to expand overseas markets, establish branches, or build their own international brand, they will often consider registering companies in countries or regions outside mainland China.

In the current context of international tax transparency, OFFSHORE operations are being transformed into ONSHORE, and it has become difficult for pure OFFSHORE operations to meet tax planning needs.

Secondly, in addition to tax planning considerations for corporate income tax, business owners also have to consider personal income tax – that is, changing their tax residency status. In order to officially change our tax status, we must first choose a place or country suitable for us to live in. (Hence, it is impossible to change your Chinese tax registrationstatus by merely buyinga passport from a small country while still having your business and residence located in China.)

In the current conditions, the best choice for us Chinese to find a suitable place to truly change our tax registration is to register companies in Hong Kong or Singapore.Both Hong Kong and Singapore currently have low tax rates.

So how do we choose? What is the difference between Singapore and Hong Kong? When choosing between a Singapore companyanda Hong Kong company, in addition to the initial costs, it is also necessary to fully consider the government policies, related procedures, and post-operation and maintenance issues of the two places.

World Trade Enterprise Consultancy Co., Ltd. provides Chinese entrepreneurs with corporate services in Singapore and Hong Kong. Combining more than 10 years of practical service experience, today I would like to discuss the situation in Hong Kong and Singapore.

International Competitiveness

Hong Kong: China's special administrative region with a clean government, good public security and a strict legal system, bordering Shenzhen Province, just threehours by plane from Shanghai.

Singapore: An independent, multicultural immigrant country, with a 74% Chinese population, stable politics, a developed economy and a well-established legal system, four or five hours byplane from China.

Hong Kong and Singapore are each one of the Four Asian Tigers. The combination of Chinese wisdom and Western institutions makes them both major global free trade and financial centers. In terms of trade facilitation and banking services, they are both of sufficiently high quality.

The difference is that Hong Kong is a region, and a part of China. Singapore, on the other hand, is an independent country and one of the ASEAN member states. This is the most important difference.

Secondly, Hong Kong and Singapore have had different development priorities in recent years. Singapore has more prominent advantages than Hong Kong in communications, IT, petrochemical, biomedical, and maritime affairs. Especially in recent years, Singapore's openness towards blockchain technology and digital currency has made it hugely attractive to emerging technologies and related investments.

Singapore was ranked secondin the world in 2018 in the Latest International Competitiveness Rankings released by the World Economic Forum, and Hong Kong was ranked seventh.

When considering setting up an overseas company, one needs to consider whether to choose Singapore as an independent country, or Hong Kong as an area within the jurisdiction of China. In terms of tax audits, legal disputes, and intellectual property rights that may be involved in the future, differences between countries and regions will have a large impact.

The Company Name

Hong Kong: Names must be in bothChinese and English, with traditional characters for Chinese names. Names in Chinese and English respectively are allowed to have meanings that aren’t translated literally. In most industries, keywords can be used with fewer restrictions. However, in recent years, the changes in policy for opening accounts in Hong Kong banks have had a slight impact on naming. The name of the company must not contain words such as "International" and "Group" unless certain requirements are met.Otherwise, it is impossible to open a bank account in Hong Kong due to the company name.

Singapore: Namesmust be in English, with a fixed company name ending, such as the most commonly used company type, "Private Limited" or PTE. LTD. Aside from companies with certain keywords, pre-approval is required. Company names including most industry keywords can be quickly registered.

The Requirements for Shareholders and Directors

Hong Kong: Shareholders and directors do not have nationality restrictions orrequirements, but in order to be able to open a bank account, it’s not recommended that people in sensitive regions or countries act as shareholders or directors. Shareholders and directors must be at least 18 years old; there must be at least one shareholder and one director, and the director and shareholder can be the same person at the same time.

Singapore: At least one person is required, and there is no restriction on nationality. One of the biggest differences is that companies in Singapore must have at least one local Singaporean as a director. They must be at least 18 years old with a legitimate identity card. Those who have declared bankruptcy, or have been sued for lack of integrity cannot be a director.

Business Scope of the Company

Hong Kong: There are no restrictions on business scope, except for industries that require pre-approval. In the past,business scope was not required to be written into the BR business registration certificate of the company registered in Hong Kong. However, new regulations now require you to indicate your business scope to complete your registration.

Singapore: Refer to the Singapore Standard Industrial Classification (SSIC) for the selection, which consists of 22 industry categories. Each business scope consists of a 5-digit code and an English description. Each company can choose 1-2 business scopes to be displayed in the company information report.

Statutory Secretary of the Company

Hong Kong: Every company must have a statutory secretary. Since March 2018, it must be a Hong Kong secretarial company with a "trust or company service licensee". Operating illegally without a license leads to a fine of up to HK$100,000 and imprisonment for 6 months. (Our company has obtained this license).

Singapore: Every company must register a statutory secretary and only a qualified local Singaporean (such as a licensed accountant, a lawyer, or a professional secretary with 3-5 years of experience) can take up this role. Our company has met the requirements and is qualified to act as a statutory secretary.

The statutory secretary is concerned with all companyprocedures related to the government. The governments of both places have stricter and more standardized regulations on the requirements of the secretary and the supervision of the license of the company service agencies. I would also like to remind all customers that it is very important to choose a strong and legal secretarial company with a license.

Follow-up Maintenance

Hong Kong: Annual audit. If there is no operating company, a tax declaration without operations can be made. If there is an operating company, accounts and audits must be prepared in accordance with tax laws and regulations.

Singapore: Annual audit. If there is no operating company, a Zero-Tax declaration is applicable. If there is an operating company, accounts must be prepared. However, not all companies need to be audited. Only companies with an annual turnover or assets reaching 10 million Singapore dollars (about 50 million yuan), and companies with over 50 employees need an audit.

Operational companiesboth in Hong Kong and Singapore are required to create accounts. The difference lies in auditing. Hong Kong companies need to be audited regardless of their size. Singapore companies do not need to be audited if theyare a small company.

Financial Bank Account Opening

Hong Kong: Over the years, the majority of domestic customers that set up overseas companies choose to open bank accounts in Hong Kong. With the in-depth development of global anti-terrorism and anti-money laundering efforts, Hong Kong banks’ account-opening policieshave been further tightened in the past two years. The cost of opening accounts has increased significantly compared with the previous two years, and the efficiency of account opening has also declined.

Singapore: As the world's third largest financial center, Singapore is home to some of the world's major banking institutions. As a Chinese settlement, Singapore has quite a number of Chinese bank managers who can provide Mandarin services to Chinese customers. Account opening takes about 2-3 weeks and the difficulty and costs are moderate. Compared with Hong Kong banks, it is a little easier and less demanding.

Finally, whether it is a Hong Kong company or a Singapore company, there must be a statutory secretarial company to submit administrative procedures. The Singapore companymust have at least one local director and at least one qualified statutory secretary. Therefore, it is most important to choose a reliable statutory secretarial institution.

Singapore and Hong Kong are both “an inch of land, an inch of gold” areas with high land prices and high rental rates. If you register a company by yourself, you will need to rent a local office with a high rent. You will also need to hire local people to arrange and submit various administrative procedures for the company. The cost of labor is high. If you choose a professional secretarial company, you can get the local business addresses and local services at a lower cost.